Debt can be just like a disease, such as cancer, HIV or even high blood pressure. It can be manageable, or even better, cured! By managing debt, you can continue to stay current and just pay minimum payments. To cure debt, it needs to be paid off in full. If you already fell behind on your payments, possibly a program such as debt validation or debt settlement can be the best route for you to take to become debt-free. However, today’s post will talk about the best method to paying off all of your debt when current on payments. This method is also the best way to improve your credit score.
Debt has a cure.
The first step to eradicating debt is to understand all of your situation. Start by writing all of your expenses and income streams down on a piece of paper, or by utilizing Excel or a Google spreadsheet. There are many budget analysis free online templates that can be used to add up expenses and illustrate your bills. Here is a free tool that you can use for this first task, provided by Golden Financial Services.
Step two is to find money that currently is not available. Don’t worry; we are not referring to magic!
You do this by – looking for the minor expenses that you can cut out of your life. For example, in the budget you created above, you may find that going to the bar on Tuesday’s, Thursday’s and Friday’s can be cut down to two days per week, freeing up $50 per week. Or, instead of splurging at the mall once per month and spending hundreds of dollars, you can agree only to spend $150 maximum at the mall once per month, freeing up another $50 or more. Now you have made an additional $100 per month available. This extra $100 per month is what you can use to do step three.
The “debt snowball method” can be used to pay off debt. This process replicates the same methodology behind making a snowball. When you start rolling a snowball, it is minuscule, but as you continue rolling it in the snow, the snowball gains momentum and grows.
Well with debt, after getting your expenses illustrated in step one, now you can start attacking the smallest account first. Once that debt is completely paid off, this will allow you to gain momentum and grow your available cash flow. As your available cash-flow grows, this makes it easier to attack the accounts with the larger balances last. By getting the small debts paid off quickly, this is also motivating and mentally satisfying. You start to feel a sense of accomplishment.
When I say “attacking the smallest account first,” that means putting the extra $100 you freed up in step two, towards paying off the smallest debt first, and just continue paying minimum payments on the other accounts while attacking the one.
If your lowest credit card debt has a balance of $500, you will pay the minimum payment of $13 + $100 = $113 per month. This $500 balance will then be paid off in under five months. Now that this account is gone, you have momentum.
This allows you to next attack the second lowest balance, and use the entire $113 + (minimum payment on the second small account balance) = (total payment), towards paying off the second smallest debt, until it’s gone. And continue this process, gaining more and more momentum (funds) to attack one account at a time. Once all of your unsecured debts are paid off, this process should simply continue but into the secured debts next.
Eventually, you will have your mortgage on your house paid off in full. Which at that point, now you can start saving money in an IRA and 401K.
This process will cure the disease called “debt” and eradicate it from your life. Next we recommend you take a look at the Dave Ramsey info-graphic which expands on this post today and teaches people about wise investments once you are debt free.
Written By: Paul Paquin – Paul Paquin is the CEO of Golden Financial Services. Over the years, Paul has helped others to gain insight into financial obstacles through his write-ups. His articles throw much light upon the most effective ways of debt management.